By Bryan McKae
The following is meant to be a general summary of Colorado’s Public Benefit Corporation Act. The first step to deciding whether to incorporate as a Public Benefit Corporation is to discuss your business’ situation with a competent attorney.
What is a Colorado Public Benefit Corporation?
Effective April 4, 2014, the Public Benefit Corporation Act of Colorado (the “PBCA”) will allow corporations to elect to be a “public benefit corporation” (a “PBC”). A corporation that elects to be a public benefit corporation is still a Colorado corporation and subject to the rules and requirements set forth in the Colorado Business Corporation Act and the Colorado Corporations and Associations Act, except in cases where the PBCA “imposes additional or different requirements, in which case such additional or different requirements apply.”[i]
Generally, the officers and directors of a traditional Colorado corporation must act in a manner such officer or director reasonably believes is in “the best interests of the corporation.”[ii] However, that does not necessarily mean every decision made by a corporate board must maximize shareholder wealth. In fact, many courts have cited the A.P Smith Manufacturing Co. v. Barley ruling that corporations have “social as well as private responsibilities as members of the communities within which they operate.”[iii] Nonetheless, today’s entrepreneurs often desire more freedom to take into account the interests of stakeholders materially affected by their corporation’s decisions and other social benefits without having to be concerned about whether those decisions will maximize corporate value.
In response, the Colorado General Assembly followed the lead of approximately 20 other states and adopted the PBCA to provide a means for Colorado corporations to consider objectives other than just profits in their decision-making processes. As of April 1, 2014, a Colorado corporation can elect to be a “public benefit corporation,” and making such an election, its directors and officers must balance its shareholders’ financial interests with the interests of stakeholders affected by the PBC’s conduct as well as certain public benefits identified in its articles of incorporation, when making decisions.
How do I form a new public benefit corporation?
A Colorado public benefit corporation is formed in the same way a traditional Colorado corporation is formed. It is formed when articles of incorporation are filed with the Colorado Secretary of State. Unlike a traditional corporation, the PBC’s entity name must contain the words “public benefit corporation” or the abbreviations “P.B.C.” or “PBC.”[iv]
Additionally, the PBC’s articles of incorporation must state the PBC is a public benefit corporation and must also state one or more “public benefits” pursued by the PBC.[v] The term “public benefit” means “one or more positive effects or reduction of negative effects on one or more categories of persons, entities, communities, or interests other than shareholders in their capacities as shareholders, including effects of an artistic, charitable, cultural, economic, educational, environmental, literary, medical, religious, scientific, or technological nature.”[vi]
Any share certificates provided to shareholders of the PBC must conspicuously state the company is a public benefit corporation.[vii] In general, all other documentation used to organize the PBC is almost identical to that used to organize a traditional Colorado corporation; provided, however, as discussed below in this article, the PBCA imposes certain voting requirements and provides certain dissenter’s rights in the event: (i) a PBC’s articles of incorporation are modified to eliminate the corporation’s public benefit corporation election; (ii) the PBC converts into another form of Colorado entity or a foreign entity (Delaware, for example) that is not a public benefit corporation; or (iii) merges with or into another entity where the surviving entity is not a public benefit corporation.[viii] Therefore, it is important to discuss with your attorney whether a separate voting or shareholders’ agreement with drag-along provisions should be adopted to protect the corporation and its majority shareholders from being subject to dissenters’ rights if any of the foregoing events occurs.[ix]
How do I convert my existing Colorado corporation into a PBC?
Any traditional Colorado corporation that wants to elect to be a PBC first needs to review its corporate documents, including, but not limited to, any existing voting or shareholder agreement, to evaluate the consents required to be obtained to amend the corporation’s articles of incorporation. Notwithstanding any specific voting requirement contained in those documents, any traditional Colorado corporation must obtain the approval of two-thirds of each of the outstanding classes of shares of the corporation’s stock, whether or not those shares are voting shares,[x] to amend its articles of incorporation to include the items described above under “How do I form a new public benefit corporation?”
Traditional Colorado corporations are advised to seek legal assistance with the PBC election, as under the PBCA, even if the two-thirds consent is obtained, and absent an applicable and enforceable drag-along provision, any shareholder who does not vote in favor of the PBC election or who does not consent to the election has “dissenter’s rights.”[xi] In the event a shareholder obtains dissenter’s rights, the dissenting shareholder may require the corporation to repurchase the shareholder’s shares in the corporation at fair market value.
Once a traditional corporation obtains the appropriate consents from its board and shareholders, the corporation can elect PBC status by filing amendments to its articles that satisfy the requirements set forth above under “How do I form a new public benefit corporation?” And as with new PBC’s, new stock certificates should be issued indicating the corporation’s PBC status.
Before amending your corporation’s articles, it may also be necessary to review your corporation’s banking or similar loan documents to determine whether such an amendment requires the consent of any lender and also to review your corporation’s intellectual property to determine whether consent or notice of name change is required with respect to your corporation’s intellectual property.
In addition to making the appropriate amendments to your corporation’s name and articles, changing your corporation’s entity name may require you to provide notice to the IRS, banks, vendors, and other third parties regarding the corporation’s name change. Business cards and the corporation’s website may also need to be updated. And it may be necessary to evaluate whether new trade names need to be registered in various jurisdictions as a result of the name change.
What does being a PBC mean for my company’s directors and officers?
Unlike a director of a traditional corporation, the PBCA specifically requires directors of a PBC to manage the PBC’s business affairs in a manner that balances the financial interests of the shareholders, “the best interests of those materially affected by the corporation’s conduct, and the specific public benefit identified in its articles of incorporation.”[xii] As long as the director’s decision is informed, of sound judgment, and disinterested, the director will be deemed to have satisfied their duty to the shareholders and the corporation.[xiii]
The PBCA also allows the PBC to further protect its directors by including language in its articles that specifically says a disinterested director does not violate its duties of good faith or loyalty simply because he or she failed to balance the three interests specified above.[xiv] In other words, directors would not be held personally liable for breach of his or her duty of care or duty of loyalty to the company simply because the director failed to value the best interests of the corporation’s stakeholders and the public benefits identified in the corporation’s articles with respect to a particular action, though other remedies against directors might be available to shareholders in the event of intentional misconduct, a knowing violation of the law, or improper personal benefit. Corporations would be advised to include this language in their articles despite it potentially softening the impact of the balancing requirements described above.
If my corporation elects to be a PBC, what are my reporting requirements?
The PBCA requires each PBC to prepare a “report” that contains certain required information, including, but not limited to, a description of how the PBC has furthered the public benefit described in its articles of incorporation and the interests of the stakeholders materially affected by the PBC’s conduct.[xv] The report must analyze the social and environmental performance of the PBC against a third party standard identified by the PBC.[xvi] The PBCA does not identify any specific third party standards, though it imposes certain requirements the third party standard must satisfy.
The report must be provided to each of the PBC’s shareholders and posted on the public portion of its website.[xvii] If the PBC does not have a website, it must make the report available to anyone who requests a copy.[xviii]
While some early stage companies might be uncomfortable posting this report on their websites or making them publicly available, the PBCA does not require PBCs to update their reports on any specific periodic basis and does not provide any specific penalty for companies that do not make a report available. However, shareholders could theoretically file a claim against the PBC to make one available or attempt to use the lack of a current report to invalidate or pierce the PBC’s public benefit corporation status.
What if my PBC might need to terminate its PBC status someday?
Similar to converting a traditional Colorado corporation into a PBC, terminating a PBC’s public benefit corporation status requires the consent of two-thirds of each of the outstanding classes of shares of the PBC’s stock, whether or not those shares are voting shares.[xix] And absent an applicable and enforceable drag-along provision, any shareholder who does not vote in favor of the termination of PBC election or who does not consent to terminating the election has “dissenter’s rights.[xx] These voting and dissenter’s rights provisions also apply where (i) a PBC converts into another domestic or foreign entity that is not a public benefit corporation or similar entity and (ii) if the PBC merges with another entity, and as a result of the merger, the surviving corporation is not a domestic or foreign corporation that is a public benefit corporation or similar entity and the surviving corporation’s charter does not include provisions identifying public benefits identical to those identified in the pre-merger PBC.[xxi]
Electing public benefit corporation status may or may not be right for your existing or to-be-formed Colorado corporation. But if a higher corporate purpose is important to you, the marketability of your business, and your current and potential employees and shareholders, careful thought should be given to the ramifications of making the PBC election, and legal assistance is advised.
If you have any questions about forming a Colorado Public Benefit Corporation, please contact a Venture Law Advisors, LLC attorney.
[i] C.R.S. §7-101-502
[ii] C.R.S. §7-108-401(1)(c)
[iii] A. P. Smith Mfg. Co. v. Barlow, 98 A.2d 581, 586 (N.J. 1953).
[iv] C.R.S. §7-101-503(4)
[v] C.R.S. §7-101-503(1)(a)-(b)
[vi] C.R.S. §7-101-503(2)
[vii] C.R.S. §7-101-505
[viii] C.R.S. §7-101-504(4)
[ix] Note that the conversions and mergers of traditional Colorado corporations may also be subject to dissenter’s rights, so it is important to discuss with your legal counsel whether your Colorado corporation should have voting or shareholder agreements with drag-along provisions specifically tailored for your corporation’s situation.
[x] C.R.S. §7-101-504(1)
[xi] C.R.S. §7-101-504(3)
[xii] C.R.S. §7-101-506(1)
[xiii] C.R.S. §7-101-506(2)(b)
[xiv] C.R.S. §7-101-506(3)
[xv] C.R.S. §7-101-507(1)(a)
[xvi] C.R.S. §7-101-507(1)(b)
[xvii] C.R.S. §7-101-507(4)
[xviii] C.R.S. §7-101-507(5)
[xix] C.R.S. §7-101-504(4)
[xx] C.R.S. §7-113-102(g)
[xxi] C.R.S. §7-101-504(4). Note that the conversions and mergers of traditional Colorado corporations may also be subject to dissenter’s rights, so it is important to discuss with your legal counsel whether your Colorado corporation should have voting or shareholder agreements with drag-along provisions specifically tailored for your corporation’s situation.